Synthesis Energy Systems: Running Out Of Gas

Synthesis Energy Systems (SYMX) is trying to hit the gas but the coal gasification company’s problems keep slamming on the brakes. TheStreetSweeper believes its many issues will continue to build into a swerving, stop-and-go ride sure to leave investors screaming to get off.

Key aspects of the Houston company and the coal gasification business have convinced us that the worst is not yet behind SYMX or those brave souls still holding onto the stock.

It’s been just eight months since SYMX restarted its plant in China after a long, painful 2-year shutdown that left SYMX’s market cap practically sitting on empty. Finally able to sell the product, the company’s stock price revved back up to reasonable levels before taking a recent, brief U-turn on some big trades and the apparent decision by the co-founder and chief commercial officer to grab his truck-load of shares and take the nearest exit. The stock price, however, is now recovering.

But the stock value likely will once again hit the skids because we believe SYMX will soon have to shut down its ZZ plant again.

The company offered a rebuttal by email through spokeswoman Susan Roush.

“As for your query about current methanol prices, when commodity prices are lower such as they are now, the plants are able to operate in different modes and continue to generate revenues,” she said.

While TheStreetSweeper believes it could operate in different modes, we do not believe it could generate any significant revenues by doing so - especially considering its track record. A company filing says this:

“The Supplementary Agreement also provides that, to the extent Hai Hua has an unscheduled shutdown, and the plant continues to operate on standby during such period, Hai Hua is still required to pay the energy fee to the ZZ Joint Venture.”

So the plant would be operating and, under that scenario, the revenue could be expected to be the undoubtedly insignificant fee.

The “clean coal” company sells its coal-based syngas technology and equipment to its partner in China. Zao Zhuang, or ZZ, uses the syngas with coke oven gas to produce methanol, which is used to produce more complex chemicals or blended with gasoline for motor fuel. Naturally, ZZ wants as high a price as possible from its methanol. And a high price is necessary because operating expenses are so high.

Now, methanol prices are hovering around a 2-year low, threatening to once again shutter the plant. SYMX stands to face not quite the revenue drop to zero that it suffered last shutdown, but a significant sales decline all the same.

STEEP METHANOL PRICE DROP SETS UP SHUTDOWN

The methanol price chart, combined with the stock price chart, essentially predict the next plant shuttering.

The chart clearly shows the price per ton of methanol in China began to drop in September 2011 and fell to $350. When that happened, operations at the ZZ plant were turned off, and the stock price dropped as shown in the second chart. Though the company filings stated the plant was "kept idle while we develop a revised commercial agreement," it remained shut off as the prices lingered, except for about a month, well below $400 through the fall of 2013.

Then, in December, the methanol price shot up to $550. Eager to take advantage of the massive hike, the buyer wanted to purchase syngas again. So the joint venture restarted the syngas plant.

SYMX also made the most of the surge from a public relations standpoint.

Avoiding mentioning that the plant had been shuttered for two long years – something disclosed in SEC filings months earlier - and emphasizing instead a retrofit and upgrade - SYMX president and chief executive officer Robert Rigdon said in a statement last December that prospects look good for the reopened factory.

“Our goal is to achieve an average run rate at ZZ for calendar 2014 of approximately 90,000 tonnes of methanol,” Mr. Rigdon said.

“Based on recent and historical market pricing of methanol, this would generate $30 million to $40 million in annual revenues.”

UNDER SHUTDOWN, REVENUE EXPECTED TO DROP DRAMATICALLY

So Mr. Rigdon stated that those projections depend on a lofty run rate goal and recent historical methanol prices.

But methanol prices have plunged again since then. This time, to $340.

That is $10 per ton below the price that coincided with the plant shutdown that went on and on, month after month, year after year.

If, for some reason, the buyer continued to produce methanol priced at this low rate, projected ZZ revenue of $30 million - $40 million would plummet to $11 million - $15 million per year.

And, keep in mind, that would be at the target run rate of 90,000 tons, a rate which it has never come close to achieving.

SYMX is wrapped up in a withering situation, says a commodities analyst who asked not to be identified.

“I think there’s a real risk that the plant will be shut down,” he said.

TheStreetSweeper believes a plant shutdown is likely imminent – along with essentially zilch ZZ revenue. It’s anybody’s guess how long the methanol price will remain at or around this record two-year low.

CHINESE INVESTORS NAB BIG PERCENTAGE; THE CCO MYSTERY

Investors may want to take a look at some of SYMX’s biggest shareholders.

Click on page 11 of this link to see that 16.3 percent of the company is owned by two investment groups in China. Together, they hold more than 10 million shares of SYMX, which emerged in 2003 under a shell company called Tamborine Holdings, trading on the Pink Sheets.

Today, co-founder and, apparently, former director and officer Donald Bunnell, owns a whopping 3.7 million shares. At least he did as of the October 2013 Securities and Exchange Commission filing.

But he’s been extremely busy selling SYMX, often knocking off 20,000-share lots at a time under his automatic trading plan, machine-gun fast. As the only insider who’s apparently selling off, he’s sold shares for as little as $1.05 and has winnowed his shares down to less than 3.5 million.

In fact, he’s pocketed over $375,000 from trading SYMX since April 2013. His last recorded sale happened in February at an average $1.63 apiece, about a month before the last big public offering of 8.3 million shares at $1.80 (for perspective, a share fetched more than $13 in 2008).

Now disclosures of his trading may have slipped from public view. And so has he.

Mr. Bunnell took on the title of chief commercial officer in July 2013 and began working on key areas of technology licensing, equipment sales and engineering services. This employment agreement allows SYMX to strip him of his employment – or Mr. Bunnell to call it quits – with or without notice.

It appears that is exactly what’s happened.

Suddenly, Mr. Bunnell is no longer listed on the company website, though he was listed as chief commercial officer and director last August and September. Without mentioning Mr. Bunnell, who is described in filings as a key employee whose loss could have an adverse impact on the business and finances, SYMX recently announced that another director has been named.

SYMX did not respond to TheStreetSweeper’s questions about Mr. Bunnell.

And the stock has undergone some huge trades lately that have led to the recent decline in price, though it is beginning to claw its way upward again.

JUST TOO MUCH

Unfortunately for SYMX, there are many, many providers of gasification technologies, as investors can see by clicking on this link.

At present, perhaps the most significant remaining challenge is the relatively high capital costs of gasification plants, particularly given the low capital investment required for NGCC(natural gas combined cycle)-based power production combined with low natural gas prices currently being experienced in the domestic market.

Indeed, as shown on page 52 in its recent 10-K, SYMX has spent $608 million on its technology. But SYMX recorded well under $5 million last quarter in revenue (disregard the $2.6 million noted in revenue because that is its sale of gasifier reactors to itself).

It would take 30 years to pay off that pricey technology – even if that were profit. But since this bleeding company has lost over $157 million since its inception in 2003, it couldn’t even get it paid off in a lifetime!

Using technology that converts low-grade coal into methanol, the technology company has been around for 11 years but still considers itself a development stage enterprise.

With the business financed by three public offerings - including that one in March 2014 – and loans from Chinese banks, the money-losing company operates three segments, all China-based:

ZZ JV– Joint venture designed to produce syngas to sell to the company next door, which combines syngas with coke oven gas to produce methanol and also converts coke oven gas directly into methanol. Used in the 1900s, syngas is gas produced by gasification or burning at extremely low temperatures of a material such as coal. Syngas is a fuel source that the plant combines with coke oven gas to make methanol.

Yima JV – Joint ventures on a small plant hoped to prove the technology’s commercial potential for a larger plant. Despite Mr. Rigdon’s recent upbeat comments, the money-losing plant operates at “limited capacity,” amounting to 27 percent in the most recent quarter ended in March. This plant, too, was shut down in May to “complete improvements… Much of the work has been leftover items from the construction phase, which were hastily completed or not properly completed.” Filings note four times in just one paragraph that SYMX has little influence over operations.

JCM JV – Joint venture with a Chinese machine company. The joint venture hopes to make money in that area by licensing gasification technology and selling equipment.

CONCLUSION

SYMX probably deserves its volatile stock price history, worsened by everything from NASDAQ delisting threats in 2008 and 2010 to the more recent plant shutdowns to insider selling and the unexplained disappearance of an officer and cofounder.

But those issues are merely reactions to a very real, fundamental problem with SYMX’s business. That is, the SYMX solution has never been profitable and we doubt it ever will be profitable. The company can be expected to throw more money at the problem, through measures such as more Chinese bank loans and public offerings – if it can find anyone to buy in. That would be doubtful, especially considering the unfortunate experience of the purchasers in the March public offering who are holding $1.80 shares when the share price is currently slightly over a buck.

Meanwhile, some of the lowest methanol prices in years will likely prove to be the painful catalyst that we believe leaves SYMX no way out but to shut down its plant – and its primary means of revenue.

* Important Disclosure: The owners of TheStreetSweeper hold a short position in SYMX and stand to profit on any future declines in the stock price.

Editor's Note: As a matter of policy, TheStreetSweeper prohibits members of its editorial team from taking financial positions in the companies that they cover. To contact Sonya Colberg, the author of this story, please send an email to scolberg@thestreetsweeper.org.